An influential group of MPs has warned the UK government that its offer of free “guidance” to individuals on how to handle their pensions finances must be “demonstrably impartial” – a requirement that industry commentators said might be tough to achieve.

The Treasury Select Committee, a group of MPs chaired by Andrew Tyrie which reviews the UK's budget and financial policy, today published its verdict on Chancellor George Osborne’s move in March to scrap tax rules that encourage UK retirees to buy annuities — products sold by insurers that guarantee a pension income for life.

At the time, Osborne said this greater freedom must be accompanied by an offer of “free, impartial, and face-to-face” guidance on annuities, and all the other retirement-income products available. He wants the guidance system in place by April 2015.

But many in the industry have since questioned who is to provide the advice and how much it will cost to deliver it.

Adrian Boulding, director of pensions strategy at Legal & General, said: “The key word is ‘impartial’. Impartial does not mean the same thing as independent – it means ‘not interested in the outcome’. That rules us out at L&G, because we are very interested in the outcome, we want people to buy retirement products from us.

“But it also rules out many other people, such as independent financial advisers. They want the outcome of the pensions guidance process to be that people then buy regulated financial advice.”

In evidence to the committee, Otto Thoresen, director-general of the Association of British Insurers, said that his members, the insurance companies, could deliver this “and deliver it cost-effectively”, but that “the test we would have to pass is one of genuine and demonstrable impartiality”.

However, pensions expert Dr Ros Altmann said the FCA “needs to get to grips with how we can deliver cost-effective, impartial guidance or advice that has minimum standards and no product sale link at all”.

“The idea that some insurance companies suggested straight after the budget that their own sales staff or telephone operators, whatever they are called, could provide this guidance is a non-starter for me. This has to be independent.”

The Committee concluded the guidance “must certainly not be biased in favour of any particular product type or provider”, but left open the question of exactly who would provide it.

The report also highlighted that the estimated cost of the advice would be £120 million a year, based on a PwC investigation. The ABI said this would not seem an “unreasonable” estimate while the NAPF said it looks like the right “ballpark”. Both the NAPF and the ABI said the cost would ultimately be passed onto the consumer.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said the £120 million “looks like a very high estimate to me”, particularly if the guidance process were partially automated. But Boulding said he could see how the figure was “not unrealistic”.

This upper estimate, if it proved accurate, could add as much as 10% to the pensions industry’s annual costs charged to members. Based on an average fee-cost for a defined contribution scheme of 0.52% of fund assets a year – likely to be an underestimate – and fund assets worth around £215 billion, the industry’s annual fee-take is likely around £1.1 billion a year.

The Committee also pointed out that the FCA would need to call on its new powers to ensure the financial services industry does not suffer any further reputational damage due to the array of pension based products due to be created following the reforms.

The FCA will be given powers to intervene earlier. The Treasury Committee said that the FCA’s new powers to intervene early in practice would be extremely difficult to accomplish without creating other forms of consumer detriment.

“In particular, it will be essential to avoid stifling market innovation. The use of these new powers will be a major test of judgment-based regulation.”